Michael Porter’s Five Forces Essay -- Business Strategy Analysis

Porter’s 5-Force Analysis Michael Porter’s 5-forces can be used to analyze an industry and help shape and create a â€Å"competitive strategy† (Porter, 6). Understanding each of the five forces and how they interact with one another provides a clear picture of the degree of competition being faced within an industry, and therefore its relative attractiveness. The understanding cannot provide an advantage; it is what you do with the understanding. Without the understanding, a strategy can be at risk of being unrealistic. Michael Porter’s 5-force Analysis is a tool for the structural analysis of industries. There are 5 forces that always shape the competitive structure of an industry: Supplier Power, Barriers to Entry, The Threat of Substitutes, Buyer Power, and Industry Rivalry. I. SUPPLIER POWER Supplier power is the ability of a supplier to control the cost and supply of the inputs in the market. The supplier power of an industry can be altered in many ways: 1) Differentiation of Inputs – If a company needs various inputs from different suppliers, then those suppliers have a high power. 2) Switching Costs for Transferring to Other Suppliers - Supplier power is high if the cost to switch over to a new system is high. 3) Availability of Substitutes – If the raw material that’s needed for manufacturing can be replaced with alternatives, the supplier power is low. 4) Supplier Concentration – The fewer suppliers there are, the higher the supplier power. 5) Suppliers’ Dependence on Volume – If suppliers are dependent on supply volume, then the supplier power is low. 6) Cost Relative to Total Purchases in the Industry – If a company thinks that they are being overcharged, they may switch to another supplier. 7) Impac... ...dia.net (30 January 2003) Legamedia.net is mainly a foreign website written in Dutch about Porter’s Analysis. 6. http://panko.com (30 January 2003) This website is a Ray R. Panko’s personal business website. Ray Panko is a Professor at the University of Hawaii and has written a number useful sources about information systems and communications. 7. http://www.quickmba.com (29 January 2003) This website includes a detailed summary of Porter’s Analysis. Information used from this site includes a diagram of Porter’s Five Forces. 8. http://www.themanager.org (31 January 2003) This website offers a description of various management tools including Porter’s Five Force Analysis. 9. Porter, Michael E. Competitive Strategy. New York, New York: The Free Press, 1980. This book written by Michael Porter is unaltered information about his theory.